Can you pass a Social Security test?

By Anne Tergesen

How much do you know about Social Security? If you’re like most Americans, the answer is: not much.

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A test no retiree can afford to flunk.

This pessimistic conclusion comes from Financial Engines, a Sunnyvale, Calif. company that manages 401(k) accounts and IRAs on behalf of people who want investment help. When the company administered an eight-question quiz about Social Security to about 1,000 people ages 55 to 70 in October, almost three-quarters got a grade of “C” or lower (meaning they got six answers or fewer correct) and only 5% received perfect scores.

The takeaway: “Americans aren’t very well informed about how Social Security works,” says Chris Jones, chief investment officer at Financial Engines. And the stakes are high, since these benefits comprise 90% or more of the retirement income of a quarter of all American couples and half of single individuals.

To some extent, Social Security education is a losing battle. While the questions on Financial Engines’ quiz aren’t all that difficult (in fact, 7 of the 8 questions are true-or-false), Social Security’s rules are voluminous and byzantine. For couples, there are about 8,000 different claiming strategies to choose from, says Jones: “It’s not realistic to expect a typical person to be able to evaluate all the possibilities,” he says.

Picking the right strategy can make a big difference in a retiree’s wealth. For a single individual, a wise choice can inflate lifetime retirement income by as much as $100,000. For couples, an optimal strategy can add $250,000 or more of benefits over a lifetime. Given that the average 401(k) balance for a worker in his or her 60s is only about $125,000, maximizing Social Security is key, notes Jones.

For many people, it pays to defer Social Security. For every year you wait between age 62 (when you first become eligible) and age 70, benefits rise by 6% to 8%. Because Social Security benefits are also adjusted for inflation, delaying “is a screamingly good deal,” says Jones. “The government is giving you a 6% to 8% guaranteed real return” for every year you delay claiming, “which is vastly higher than the return rates we see in the economy today” for investments with a comparable low risk, he says. (For some people, including those who are single and have a short life expectancy, it may not pay to wait.)

While delaying taking benefits until age 70 is optimal, “delaying Social Security for even one or two years can make a big difference in household retirement income, and especially for the surviving spouse,” he says.

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Encore looks at the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities, needs and priorities of people saving for and living in retirement. Our lead blogger is editor Matthew Heimer, and frequent contributors include editor Amy Hoak, writer Catey Hill, and MarketWatch columnists Elizabeth O’Brien, Robert Powell and Andrea Coombes. Encore also features regular commentary from The Wall Street Journal retirement columnists Glenn Ruffenach and Anne Tergesen and the Director of the Center for Retirement Research at Boston College, Alicia H. Munnell.